Long term unsolicited credit rating at level AAA. The agency expects a stable outlook for the following 12 months. The rated entity was notified on October 3, 2018, about the rating and after the notification there weren’tchanges or amendments in the rating. This is the first release of the rating for distribution.

The credit rating assigned to Switzerland stems from a strict fiscal rule, high level of foreign reserves and a very high assessment of governance and economic stability. The fiscal rule, which assumes balanced budgets over the business cycle, is lowering the debt to GDP ratio, which is expected to decline to even lower levels in the future.

Rating components

Macroeconomic factors of rating assessment

The Swiss economy has somewhat below average growth perspectives in the medium term, low government deficit and debt levels, and plentiful resources to tackle possible headwinds.

Growth perspectives of a high income country: As a country with very high GDP per capita and labor productivity levels (and thus, with lower growth potential), Switzerland is experiencing below average rates on the global scale. This trend will most probably continue in the coming years. Growth rates of real GDP in the range of 1.5-2.5% are expected in the medium term.

Inflation and nominal GDP growth ratesSources: IMF, ERA

Switzerland also experienced a period of very low nominal GDP growth. In the last five years, nominal GDP growth has averaged at 1.3%. This was due to negative price growth. The ultra-loose policy of the Swiss National Bank, which keeps the three month benchmark LIBOR rate at -0,75%, the lowest in the world, succeeded in ending deflation. The year-on-year change of the consumer price index rose above 1% recently, for the first time since 2010. A pick-up in inflation has had a positive effect on the nominal GDP growth, which is thus expected to grow by more than 2.5% in the coming years.

Balanced budget and low debt levels:

Unlike other countries with extremely low nominal GDP growth levels (i.e. Japan or Italy), Switzerland did not experience a worsening of fiscal health. This is due to a balanced-budget fiscal rule. It was approved by means of a referendum and took effect in 2003. According to this rule, the budget must be in balance over the business cycle. It allows certain adjustments by either allowing for deficits during recessions or forcing lawmakers to have surpluses during economic booms. The Swiss government follows this rule strictly. The highest deficit recorded during the last decade was only -0.4% GDP. Balanced budgets are the main factor contributing to the decline in debt levels. Debt to GDP ratio fell from its peak of 59.6% in 2004 to 42.8% in 2017, even in a low nominal GDP growth environment, and is expected to decline further.

Foreign currency reserves higher than GDP:

A massive build-up in foreign reserves has occurred during the past decade, when the Swiss National Bank was fighting deflationary risks by selling large quantities of Swiss francs on the foreign-exchange markets in exchange for foreign assets. Foreign-exchange reserves currently exceed 100% of GDP and can cover almost 20 months of imports. The foreign dependency indicators are among the best in the world. The risk of a currency crisis is, thus, extremely low.

Foreign currency reserves in USD and months of imports

Sources: Swiss National Bank, World Bank

High population growth: Another positive factor for the future ability to service the debt is the development of demographics. The average annual population growth over the last decade was above 1%, the most since the sixties. While the major contributing factor was migration, there was also a pick-up in the rate of fertility. In 2016, it stood at 1.54%, the highest since the early nineties. Higher population and fertility rates increase the potential for future GDP growth.

Record household debt: Elevated household debt, which was fueled by negative interest rates, poses some concerns for future development. In 2017, the household debt to GDP ratio was 128% according to BIS, the highest among rich economies. High levels of imbalances in the household sector imply a risk of correction in the property market. A strong correction might have a negative impact on the economy and the health of the financial sector and eventually become a fiscal burden.

Forward-looking factors of rating assessment

One of the highest levels of governance indicators and R&D spending in the word.

One of the world’s leaders in R&D spending:

In 2015, Switzerland invested 3.4% of its GDP into research and development, the third highest in the world after Israel and Korea. Switzerland is also among the world’s leaders is patent applications and R&D personnel per capita. The economy has, thus, a very high innovative potential, which is likely to contribute to higher potential GDP growth levels in the future.

Trust in public institutions:

According to the EU survey on income and living conditions, Switzerland has by far the highest level of trust in the political system and scored among the best in trust in police and justice system. This implies a very supportive environment for the allocation of the resources in the economy and thus for the future potential growth.

Very high governance indicators:

Switzerland scores among the best in the world in World Governance Indicators, which are released by the World Bank. This implies high quality of government institutions and low rent-seeking.Selected World Governance Indicators (ERA score, 1-10):

Source: World Bank, ERA

Outlook: Stable

The outlook has been assigned based on expectations of continued government adherence to the fiscal rule.

The Stable outlook assumes that the rating will most likely stay unchanged within the 12-month horizon.

Key assumptions

Government’s adherence to the fiscal rule

Inflation above 0.5% in the medium term

Real GDP is expected to grow between 1,5 and 2,5% in the medium term

Potential outlook and/or rating change factors

A negative rating action may be prompted by:

Substantial deviation from the fiscal rule causing the debt to grow above 60% of GDP

Substantial decline in the property market followed by bank bailouts worth more than 20% of GDP

Appendix 1. Peer-analysis materials

Annual Population growth (%)

General government debt/GDP (%)

Source: IMF

Appendix 2. Major sovereign indicators

Appendix 3. List of material data sources

International Monetary Fund

World Bank

Bank for International Settlements

Eurostat

The Federal Statistical Office

Swiss National Bank

Regulatory disclosure

The unsolicited credit rating and outlook were issued in accordance with ERA methodology for sovereign entities in the version from July 4, 2018 (available at www.euroratings.co.uk, section Methodology). In the same section, there is a rating scale, including an explanation of the importance of each rating category, and a default definition. Information on the rate of historical failure is available at www.cerep.esma.europa.eu, and the explanatory statement of the meaning of those default rates is available at www.euroratings.co.uk (Regulatory Framework/Disclosure). This rating is issued as an unsolicited rating, i.e., was not initiated by the rated entity or a related third party. The rated entity did not participate in the rating process and the information and documentation for its development was obtained from publicly available sources in accordance with ERA methodology. ERA did not have access to the rated entity’s internal documents. ERA, in the context of routine care, verified all sources entering the rating process. ERA considers the scope and quality of the information entering the analytical process to be sufficient to assign a credit rating. The disclosure of the unsolicited rating and outlook was preceded by the approval of the Rating Committee. No actual or potential conflicts of interest have arisen. Since July 30, 2012, ERA has been a registered credit rating agency according to the Regulation of (EC) No 1060/2009 of the European Parliament and of the Council of September 16, 2009 on credit rating agencies.